"The current QE bubble has featured a massive expansion in corporate and covenant-lite debt, largely to finance leveraged acquisitions and repurchase of stock. In recent years, the Fed has not simply engineered a temporary euphoria in valuations, but has also profoundly affected the long-term capital structure of U.S. companies by subordinating the claims of stockholders to the claims of bondholders."
He implies that corporate debt levels have gotten very high, but provides no data that the "long-term capital structure of U.S. companies" has changed meaningfully. He blames the Fed for "subordinating" stockholder claims. Um, in the capital structure the common shares are always at the end of the line. That's how it works. Common shares are a residual claim after all other creditors are paid. Oddly, he began by mentioning that new debt was "covenant-lite". But less stringent terms on bond issues are a risk for the *bond investors*, not the equity owners. Those "covenant-lite" terms often allow the company to avoid default during times of stress, giving equity owners breathing room.
He's got this backwards.
Though I think Hussman likes to think of Jeremy Grantham as a kindred spirit, if you read both of them you'll quickly figure out that Grantham uses a much broader approach. Grantham / GMO have also undertaken rigorous analysis of historical bubbles and Grantham isn't afraid of eclectic approaches that are imperfect mathematically, but very helpful when added to the array of tools he uses. Hussman essentially uses one approach, regardless of how many quant sub-models he has.
I remember Grantham has talked about the potential for a real bubble from here - reaching 2-sigma, I think, at about 2,300 on the S&P500. And it could overshoot.
GMO can handle it. I wonder if Hussman's funds can.
Hey, CMG could earn $20/shr in 4-5 years and be growing at about 10%/yr by then. So today's $437 only represents a 22x 4-5 year forward multiple and a 2.2 PEG. I mean, why aren't value investors jumping in! (sarcasm)
clairvoyance? you better hope you can time your future market purchases perfectly to capture those very transient dips to the lowest levels.
Nobody rings a bell at the top.... or the bottom.
And spinning himself as an optimist, because he thinks the market will fall by half. It's the "pessimists" who accept that "the market is doomed to suffer extreme valuations and dismal expected returns forever". Of course, not even his own models indicate that today's market leads to dismal returns "forever". Silly.
Markets may not be fully "efficient", but they're not so easy that a smart guy can simply apply some stats to a handful of historical market measures and go long and hedge the downside (no matter how "dynamically" or sophisticated) and move off of the risk-reward curve meaningfully.
Rates at zero forever implies a depressed economy / secular stagnation forever, which implies lower profit margins over time. Stocks still demand a risk premium and there are plenty of risks over time.
The inflation conspiracy thing is just silly propaganda. There are plenty of private measures the comport with official government statistics. The inflation conspiracy folks just toss together some choice figures and then apply absurd techniques that fool people that don't understand the proper analysis.
Fundamentals always come home to roost. In that, Hussman is "correct". Buffet & Munger, a couple of the best investors in history, often quote Graham "In the short run, the market is a voting machine but in the long run, it is a weighing machine." In other words, fundamentals win in the end. To see the essential truth in this, one must remember that "the market" is made up of individual firms. Over time the valuation of each individual firm will gravitate towards (oscillate around) it's fundamental value. If a firm begins experiences losses and we can see the underlying business is deteriorating, its market value will fall. Over fairly long periods of time, we can see multiples generally expand and contract, but they neither contract towards zero forever nor to they march higher and higher without bound. Thus, the non-fundamental and macro influence is bounded over time. Fundamentals always matter in everything over time.
Indeed Hussman sometimes reflects on the need of long-term buy-and-hold investors to be able to hold during the depths of a severe downturn, noting that too many investors buy high and sell low. He promises to do the hard work for his investors by both hedging them against severe declines when markets are extended and ensuring they aren't out of stocks when the market has tanked. Instead, he panicked at the depths of a generational market decline and his investors suffered.
Dishonest or delusional or both. It is amazing how difficult it is to distinguish between incompetence and malicious intent in so many things. (There's an old quip about government conspiracy theories being based on a misunderstanding of what incompetence looks like when it is joined with the CYA lack of accountability found in most large organizations.)
Hussman is deep into "motivated reasoning" at this point, trying to protect his priors and his ego and his future. It becomes difficult for the person to himself understand when he's engaged in deception.
Don't we see this in highly politically partisan people all of that time! (That's why they "get them young" and on the record making bold, public statements for something - they know how very difficult it is for people to change views once they've publicly committed to them.)
If you're handicapping the market on politicians, good luck.
Many investors, like me, have moved more and more into cash as the market has extended advances. Good investors weren't in cash for the bulk of the massive move up since 2009.
That's a desperate way to try to deflect attention away from the matter at hand. The relevant question is how actual money managers behaved prior to, during, and after the 2008 crisis. The very large majority have outperformed Hussman. Even if the market falls 50%, most would still be well ahead of Hussman, especially once the market eventually recovered.
Entering the crowded better burger space late in the game is a cry for help, a wild swing at something to give the sell side analysts and excuse to juice numbers.
If you're very confident in such a large drop, you also need to declare the timing. Then place your money where your mouth is. Do you have a large portion of your wealth invested in deep out-of-the-money puts? Hey, the market sure looks elevated to me and vulnerable. But it could also drift sideways in chop or even move higher, including a melt up and this could happen for years. That is what markets do: They don't do what simple (*) historical models predict. As Charlie Munger said about investing, "It's not supposed to be easy. Anyone who finds it easy is stupid."
* And, yes, even though Hussman's model(s) included tons of data and presumably use lots of statistical analysis tools, at the end of the day, they're mechanical, pattern seeking and based on historical data. Consider for a moment who Hussman and his little shop are up against. They're not up against the strawmen he puts in his weekly commentaries - those foolish TV commentators and naive perma-bulls. No, he's up against real professionals, including dozens if not hundreds of quant shops with way more brain power, computing power, and data access than he has. These shops each have several Hussmans in them, and those are just the data and model guys. They can eat Hussman's lunch coming and going, including front-running trades against his model, which is slower to update and execute. They can access more esoteric non-exchange hedges and then go on the other side of Hussman as part of arbitrages. Etc.
No, anchor8888, we have not forgotten the possibility (likelihood) that this is only half of the full cycle. Indeed, what we've tried to convey is that:
1) Hussman fell down on the job in multiple ways that should have been completely avoidable, namely a) failure to follow his own models when he panicked and b) having half-baked models that took years to update while he made confident proclamations to investors, only discussing his model's deficiencies after those deficiencies, combined with his earlier panic, had destroyed so much shareholder value. Those lost returns aren't coming back. Ever.
2) It is highly likely that the fund will perform very poorly unless this cycle includes a fairly sharp and deep decline. If it instead includes lots of chop with gradual declines and partial reversals for many years, it is unclear he can manage a profit out of it.
Actually, the possibility that Hussman is right and the S&P is about flat vs. today 10 years from now is reasonable. One way to do it - I've got an Excel model with multiple parameters to produce very "real looking" stock movements that mimic past volatility and broad movements, but with multiple randomizing inputs - is to take a long-term log-normal chart of the S&P500 and then draw various scenarios for the next 15 years. If you do this, you can see that a market that ends up flat in 10-12 years looks perfectly normal in the context of the graph going back to, say, 1950.
Yes, I realize that is in no way a rigorous, analytical approach. But I find it interesting.
Yet your point stands. I think Hussman's fund(s) *need* a sharply declining market in the next few years to survive. Simply going choppy range-bound sideways for a decade would probably wipe the fund(s) out.
I've recently shared some thoughts and had some good dialogue regarding Hussman and his funds.
Here I'll add some more general points.
First, markets are built to knock out folks like Hussman. The amazing thing about markets is how frequently they throw curveballs (and new, never seen before pitches!) that the smartest professionals hadn't anticipated. The markets have a way of producing "outliers" more frequently than the best models built on historical data predict. And they do it in novel ways, in odd combinations, and at the strangest times and over unanticipated time periods. The story of Long Term Capital Management (LTCM) is but one in a long line of genius failing vs. the markets. These strictly quantitative investment strategies built purely on historical data end up as victims when run entirely by people completely mesmerized by their model.
Keynes said it best all those years ago. "Markets can remain irrational longer than you can stay solvent.." We have to wonder if Hussman has "stress tested" his *fund* for the possibility that this market simply chops along for many more years, pulling back gradually here and there 10-15%, but drifting upward, very slowly allowing valuations to normalize, but never allowing new investors to buy into a market that will produce 10-15% CAGR over the coming decade. What happens to the fund NAV? What happens to client inflows and outflows - when do you hit a point where the fund can't charge enough on a shrinking asset base to pay expenses?
That's for him to learn over the next 5-10 years, during which he will post about 15 - 40 rants about the Fed (whether from his perch as a mutual fund manager or as an "independent investment analyst").
Indeed. I've written separately that he has never explained why he chose to freeze in a bearish stance in 2009 instead of going with his then-current models while he completed his lengthy "stress testing". He's never explained it, because he cannot explain it except by admitting he panicked and went to his defensive bias.
It is very clear to me that the right thing to do when the world is falling apart around you is to default to your well-developed, tested model unless and until you find a very good reason to either update or abandon your model. That is why you have the model, to anchor you! Instead, Hussman did the opposite! When the seas were the roughest, he set his model aside.
Here is perhaps the best bottom line in all of this. Hussman would be a valuable member of a larger firm as a senior analyst or investment committee member. Alternatively, he could be a valuable adviser or consultant. However, he does not have the right set of skills to manage money on his own.